fdu’s Richard Morris talks to Chief Financial Officer Swag Mukerji about the differences between private equity and Plc. businesses after his extensive experience in both environments:

 

1. How does board modus operandi differ between Private Equity and Plc firms?

The two environments have a lot of similarities especially around driving performance, strategy development and governance. However, there are substantial differences, largely due to their differing medium term objectives. Private Equity backed companies are more focused on building the company for sale and therefore the board is more task orientated and primarily looks at the short term – typically a two to three year timeframe.

In contrast, the board of a Plc would typically make decisions on a longer term basis; say up to 5 years. The requirements for short terms gains – for example, achievements within one or two years – are less common, as long as the shareholders could be persuaded that the longer term gains should be built into the current share price.

2. How does the role of the Non-Executive Director differ in the two environments and in which environment do they have more input?

In my experience, both Plcs and PE backed businesses have NEDs, but the key difference appears to be their independence. Each Plc of scale has a number of independent NEDs with clearly defined roles and accountabilities. In PE the NED role itself can be quite varied – there is often no independent NEDs, and therefore the board is more likely to be influenced by the PE house. In these cases, arguably an independent NED is a very important role. I have worked with one PE which had 2 independent NEDs, both of whom were excellent; they regularly acted as arbitrators between the PE house and the management team; this was mutually beneficial. A well run Board ensures that the NEDs give valuable input to the governance and strategy of the Company and they have similar input to both Plcs and PE companies. A good Chairman is fundamental to making this happen.

The presence, or lack of, an independent Chairman in a PE backed company would be a contributory factor in deciding whether to accept a role in that company.

3. Does the board call for different information prior to a board meeting?

There is a fundamental difference in the type and notice of the information required before a board meeting. The Plc requests for information are far more predictable due to their structured and mandatory nature. The Plc CEO is more in control than in a PE environment and, as a result, they have more influence on the agenda.  The Plc NED’s may often request additional information that may be outside the usual mandatory reports, but this usually controlled by Board protocol.

On the other hand, PE backed businesses are less regulated and therefore the request for information may be less predictable and at shorter notice; the information requested by PE backed businesses is more operationally focused and is possibly more relevant. At the end of a PE board meeting Executive Directors may feel that they have had more input to the running of the company – this can be a positive or a negative!

I have worked in some PE backed businesses where an analyst has been employed with the sole responsibility of fielding information requests from the PE backer; these requests being on an ongoing nature and not just for board meetings.

4. What are the varying styles between CEOs?

The styles differs significantly for a number of reasons primarily due to the differences in the companies objectives. The pressures they face may well not be significant in scale or severity, however they inevitably manifest themselves in differing forms.

The Plc CEO’s are generally more predictable and more considered in their response to questions and decision making – this may result in taking more time to reach a decision. Their horizons may be longer term on the proviso that it is the correct thing for the business irrespective of time scales.

The CEO of a PE backed business, however, is generally more ‘short term’ orientated focusing on the maximization of shareholder value in the short term in preparation for a transaction. This may well mean that the operating style of a CEO in this environment is less orthodox as their performance is monitored very much day by day and on a shorter term basis.

5. Which type of business made the quicker decisions?

Due to the differences in time frames between the environments, the decision making process in a PE backed business is significantly shorter; this however does not always mean that the decisions are the correct ones. In a PE backed business, important decisions can be made in a matter of hours via a quick conversation with the PE shareholder(s).

In a Plc. environment, however the board may well wait for a scheduled board meeting before making a decision unless the matter is very urgent; by the time the decision has been made, it is possible that the impact of the decision may have been diminished.

6. Whilst at the Plc, what was it like being in the public spotlight?

Different people will answer this question differently. Personally, I see this as an essential part of a Plc role and all Plc CFOs must be prepared for this element. I personally really enjoyed the spotlight and relished ‘sparring’ with the analysts at the roadshows! The modern Plc CFO has to have excellent presentation skills and have the confidence not only in the figures that are being presented but also in his own abilities to deliver the associated narrative on behalf of the company. It is fair to say that this does not come naturally to all Plc CFOs.

7. Whilst working for a PE house – were you empowered to make decisions on strategy?

Not really. The elements of the strategy, typically of a two to three year timeframe were pretty much decided on by the PE house itself. Implementing and driving this strategy and the operational consequences were then down to the board itself. Primarily the strategy of a PE backed business revolves around preparing the company for a transaction, whatever that transaction may be, and maximising the shareholder value in as short a timeframe as possible. This contrasts significantly to a Plc. environment where the strategy is totally down to the CEO and the board, with the input of the Non – Exec Directors. This is then ratified (or not) through the Investor Relations cycle and the share price.

8. What percentage of your time was spent with investors?          

Overall there is not a huge difference in time spent with the investors between the two environments, maybe Plcs marginally more (PE 20%; Plcs 25%). The main difference is the nature of how the time is spent, for example: PE CFOs may have dialogue on average one day a week with investors; however in a Plc it tends to be more sporadic– there may be nothing for 3 weeks and then you would spend a whole week with investors.

9. Which environment did you prefer and why?

I enjoyed both environments but for differing reasons.

I enjoyed the PE environment due to the immediacy of the work required and the shorter term nature of the impact that the decisions made had on the company. The impact of implementing an initiative or responding to a problem could sometimes be seen in a matter of days as opposed to a Plc. where the considerations were usually far more long term.

In a Plc you have a greater degree of autonomy and you feel as though you are the master of your own destiny. This obviously is incredibly self-rewarding; however it may well take a far longer time to experience the full effects.

10. Did you look for different qualities in the candidates you hired?

Essentially I did not.

Whenever I was in a PE backed business I always tried to implement ‘best in class’ processes, systems and controls typical of a Plc. The end game of PE backed businesses is to sell – to trade, another PE firm or an IPO; all of these require Plc class systems and controls. I was however always mindful of the nimbleness and flexibility required to work in the PE backed business – these qualities are certainly not out of place in a Plc but are probably more exposed in a PE environment.

To conclude, a lot is made of the differences between a Plc and a PE backed company. In reality, from a Finance perspective, this is overplayed. The core needs are the same – a solid set of numbers and good processes which can be relied upon to inform better decision making and to more accurately predict the future. Excellent people are required in both types of companies to achieve this.